In its push for high-quality preschool, Minnesota could turn to investment bankers and philanthropists for the upfront capital that lawmakers have been reluctant to provide.

If preschool later proves to save the government money, whether on unspent special education services or by other markers, the investors would get back their seed money and potentially much more.

The model, known as Pay for Success, was pioneered in Salt Lake City, where the investment bank Goldman Sachs and the Pritzker Family Foundation received their first preschool payouts in 2015.

Sen. Orrin Hatch, R-Utah, succeeded in inserting the concept into the federal government’s new education policy law. The Minnesota Department of Education recently was awarded one of the first grants, worth $397,000, to explore the feasibility of using Pay for Success to fund early-childhood education.

“It just seemed like an opportunity that was too exciting to not throw our hat in the ring,” said Lisa Backer, the department’s early-childhood special education supervisor.

Minnesota is looking to Pay for Success not for expanding preschool but for boosting the quality of existing public preschools that serve mostly low-income students.

Officials are proposing a broad expansion of the so-called Pyramid Model, now used in only about 100 Minnesota classrooms. The framework offers increasing levels of support to children who need it and has been shown to boost social-emotional and academic skills. By training teachers and providing classroom materials and expert coaching, the department hopes to start thousands of 4-year-olds on a path for lifelong success.

As long as the intervention works, the government and its investors would see returns for years to come.

“Not only are we trying to expand government services that work, we’re trying to expand government services that actually save taxpayers money,” said Judy Temple, a professor at the University of Minnesota’s Humphrey School of Public Affairs who has studied Pay for Success preschool in Utah and Illinois.

UTAH MODEL CRITICIZED

Pay for Success, also known as pay-for-performance or social-impact bonds, is a fairly novel approach to government funding, but Minnesota would figure to benefit from the experience of Utah and Illinois.

Utah’s project was criticized for seemingly being too generous to its investors. Of 110 preschoolers identified as “at-risk,” just one was selected for special education services during kindergarten — an unheard-of outcome for a relatively cheap intervention.

For each of those 109 students, St. Lake County and the local United Way paid the investors 95 percent of what would have been spent on special education. The state will make additional payments through the sixth grade.

Minnesota said in its grant application that it would develop “a process to assure that the funding structure will in no way influence future special education placement decisions.”

HARD TO TRACK

The Minnesotans involved in the project also are looking at a long list of markers of success. Besides special education placement, they said they might track attendance and suspension rates, scores on social-emotional assessments and third-grade reading tests, and even teacher retention.

Temple said that Pay for Success programs are administratively complex, and that it will be difficult to assign a monetary value to each outcome they intend to track.

“It’s going to be challenging to identify the actual cost savings arising from these benefits, although everybody would agree that these are benefits everyone would like to see,” she said.

Frank Forsberg, senior vice president of the Greater Twin Cities United Way, said he’s confident Minnesota would find investors willing to finance the project.

“I think there’s a number of funders and donors who are very interested in helping test these ideas,” he said. “Many organizations like United Way want public-sector efforts to work better, and so we’re willing to invest.”

The greater challenge, Forsberg said, will be figuring out who will pay those investors back.

Quality preschool would figure to benefit many levels of government. Individual school districts and the state would save money if fewer students needed special education services. And if those students succeed in school and life, they won’t burden counties with the costs of incarceration or various social services.

YEARS OF SAVINGS

Another question — especially relevant to a preschool project — is how long government monitors ought to track and pay for the savings. Utah stops after sixth grade, but Chicago’s Pay for Success program follows children through 12th grade.

Studies of federally funded Head Start preschool programs have found seemingly conflicting evidence of their effectiveness. Measurable academic benefits tend to fade out by the third grade, but Head Start kids are more likely to graduate high school, enter college and earn more money as adults.

Temple said investors generally want to get their money back within five or six years, but “it’s very likely that there will be significant cost savings much further down the road.”

“The challenge is going to be not only evaluating the intervention to see if it makes a difference but also to try to attach financial savings to these improved outcomes,” she said.

At the same time, Temple said the state, or whoever ends up paying back the investors, had better be sure it’s actually saving the money it thinks it is.

“Otherwise, they’re going to have to be taking money away from other parts of the budget,” she said.

PROVING WHAT WORKS

Forsberg, with the United Way, said Pay for Success is not a sustainable way for government to pay for ongoing services. But when private investors prove that certain interventions work, they can influence state policymakers to spend more on preventive services, cutting government’s long-term costs on special education, welfare and prisons.

Utah lawmakers, for example, set aside $11.5 million for preschool for low-income kids after seeing results with the Salt Lake City project.

Kate Barr, executive director of the Nonprofits Assistance Fund, was closely involved with the state’s passage in 2011 of a law that established the structure for a pay-for-performance pilot project. That effort never took off because it put the financial risk on the service provider, rather than the investor.

Barr said part of the appeal at the time was that the state, facing a budget impasse and government shutdown, didn’t have much money to throw around.

“It was a different environment than what we are in now,” she said.

The idea of social-impact bonds, Barr said, has received “a lot of buzz, but it’s still very much untested.” She notes the programs are also costly to administer, raising questions about why the government doesn’t simply pay for services upfront.

“Many people would say that essentially, this is what public funds are for,” she said.

Josh has written about St. Paul public schools and higher education for the Pioneer Press since 2014, 11 years after the paper first published his byline as a University of Minnesota intern. He did a two-year stint on city government and crime in Austin, Minn., and spent seven years in Sioux Falls, S.D. covering crime and education, as well as editing. Josh was good at baseball once. Now he plays tennis against old men.

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Resource for those interested in Pay for Success finance. The site maintains up-to-date news and media mentions, a 'Practitioner's Toolkit', general resources, PFS activity trackers, and other information.

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